David Prosser: Don't blame Serco for seeking toprotect its margins

Outlook: Anyone in Government who thinks businesses are going to make no effort to pass on the pain of spending cuts and tax rises is gravely mistaken

Francis Maude is the cabinet minister in charge of delivering much of the Big Society agenda (Getty Images)

The threat Serco made to its suppliers – give us some of our money back or you may miss out on future contracts – was so stark that it hadlittle choice but to make a humiliating U-turn yesterday after being exposed. No doubt the public censure by Francis Maude, the minister responsible for government efficiency savings, hastened its change of heart. Mr Maude dropped some not-so-subtle hints, too – that Serco's behaviour might cost it contracts of its own.

Seriously though, how does the Government expect businesses to respond to threats to their revenue? Serco is in tough talks with ministers that will result in a cut in what it can charge for the public sector contracts that form the lion's share of its trade. Its management would be failing in their duty to shareholders if they did not seek to mitigate the damage.

Moreover, why is it acceptable for the Government to demand money off its bills from a supplier, but not for private sector companies to do the same? One might see the process as a tacit admission that ministers failed to secure value from Serco when first awarding it the contracts affected. That may be the case, but the agreements were signed in good faith.

In truth, this is just what happens when the business environment changes. The retail sector, for example, is tying itself up in knots over the extent to which it will be able to pass on the 2.5 percentage point VAT rise to shoppers in January. Will Mr Maude to castigate those retailers that choose to exploit the littlepeople rather than take all the pain of a tax rise themselves?

Similarly, no one expects theairlines to swallow the higher air passenger duty rates that were introduced yesterday. Yet it is businesses that will be hit hardest by the increases, since premium class seats on long-haul flights saw the biggest rises.

None of which is to say that any of these efforts to reduce public spending or raise additional tax revenues are necessarily inappropriate. Nor is it to excuse Serco for the crass way in which it has sought to bully contractors into accepting its demands. But anyone in Government who thinks large companies are going to make no effort to pass on the pain of such measures is gravely mistaken.

The trade-offs needed to promote SMEs

What has really upset Mr Maude and others about the Serco row is that it appears to be a case of a large company throwing its weight around with small suppliers (though Serco says the letter demanding a cash rebate was only sent to its 200 largest contractors). It's fine to play hardball with big blue-chip companies, the argument seems to be, but smaller businesses need protection.

It presumably didn't help that the Serco row surfaced just as the Government was unveiling Lord Young as its new enterprise tsar. As one of the briefs David Cameron has given him is to "improve the way governmentlistens to the views of small and medium-sized enterprises when designing policy", it wasn't helpful to see Serco making headlines for responding to a policy by targeting those very businesses.

Still, it will be fascinating to read the "brutally frank" report Lord Young has been asked to produce, because it is clear its conclusions will conflict with those made by Sir Philip Green, the retail tycoon the Government previously asked to examine public sector waste.

The new enterprise tsar has already rubbished – with tact from which Serco could learn – Sir Philip's suggestion the Government save a few quid by paying suppliers less promptly for their services. It is a practice SMEs have blamed for years for driving them to the wall, so for the public sector to behave in this way would be incompatible with an ambition to encourage enterprise.

The more difficult issue is procurement. Sir Philip's horror at the way different parts of Government order the same goods and services independently and at wildly different prices prompted his call for greater centralisation of procurement. That sounds sensible, but the move to such a system will result in more bulk orders that the largest companies are likely to be best able to fulfil. Central procurement will prove to be an enemy of the Government's stated aim of awarding 25 per cent of all public sector contracts to SMEs.

Stabilising the pensions lifeboat

That the Pension Protection Fund, the lifeboat scheme for employees of companies that go bust with a hole in their pension funds, is now £400m in surplus (last year it reported a £1.2bn deficit), is in itself a cause for celebration. The even happier news is that its long-term finances are now on a sound footing without solvent pension schemes having been hit for six by the cost of paying for the PPF.

It has never sat comfortably that well-run, properly funded final salary pension schemes should have to foot the bill for bailing out those schemes that leave members in the lurch. The risk-based levy charged on the industry, where healthier schemes pay a smaller proportion of the total funds required by the PPF, was an attempt to address that. But what will be more helpful is the move just announced to calculate the levy with reference to average funding positions.

The move from a £1.2bn deficit to a £400m surplus over the course of just 12 months underlines just how volatile pension assets can be. Had the volatility been in the opposite direction – as is bound to happen soon or later – pension schemes might have faced asudden rise in their PPF premiums. Averaging the readings out, however, should enable the PPF to smoothe its demands – and further allay the concerns of pension scheme sponsors, who are understandably upset about having to subsidise the basket cases.